Billionaire Howard Marks On The Debt Ceiling And The Inevitable Decline In Relative US Living Standards

howard marks
Howard Marks

Billionaire Howard Marks, who now runs the hedge fund Oaktree, dedicates his most recent investor letter to the big American debate right now: the debt ceiling.Of course he talks about the risks to the U.S. credit rating and the other terrible things that will happen if we pass August 2nd without a deal.

But what he also does is translate what the whole debt ceiling debate (probably) means for everyone in America.

Because the underlying issue is that the U.S. has borrowed too much, and now has a higher debt to GDP ratio than it has ever had — and because the U.S. will inevitably borrow even MORE because 1. everyone believes that lower taxes and stimulus are needed to stimulate growth and 2. if we don’t, growth in the U.S. will depress — the reality is that our lifestyle (individuals and the government spending what they don’t have) is unsustainable.

He says:

“In addition to balancing the budget and growing the economy, I think we have to accept that the coming decades are likely to see U.S. standards of living decline relative to the rest of the world. Unless our goods offer a better cost/benefit bargain, there’s no reason why American workers should continue to enjoy the same lifestyle advantage over workers in other countries. I just don’t expect to hear many politicians own up to this reality on the stump.”

His other big points:

  • “The dollar can no longer be the reserve currency” without unflinching adherence to the associated responsibilities. 
  • The debt ceiling “solution” is unlikely to represent much fundamental progress; for the most part it’ll just kick the can down the road because politicians are too concerned about getting re-elected to compromise.
  • “We have no choice but to raise the debt ceiling and keep borrowing in the short-term.”
  • “Washington’s spending has recently been higher as a percentage of the nation’s economic output than at any time since World War II. But by the same measure, Washington’s revenues are the lowest in more than 60 years.”
  • When asked about conservatives’ insistence on a balanced-budget amendment to the Constitution, President Obama replied, “We don’t need a constitutional amendment to do that [balance the budget]; what we need to do is to do our jobs.” But clearly we do need some enforced discipline, because the years in which we haven’t run a deficit have been by far the exception of late, not the rule.
  • Any action to reduce the deficit and related borrowing – be it through reduced spending or increased revenues – would have a depressing impact on an economy that is already anemic.

Oaktree Capital Down to the Wire